NDX Straddle Buyers Love CPI Day Volatility

Equity markets have been focused on inflation for some time and the result has been extra volatility for US stocks on CPI days over the past twelve months. The table below is a summary of price activity on CPI-day for the Nasdaq-100 (NDX), S&P 500 (SPX), and Russell 2000 (RUT). The expectation is since all three represent US stocks their respective markets would share pricing characteristics around CPI reports.

Data Sources: Bloomberg & Author Calculations

The first two columns following the respective tickers above show a dramatic difference between single-day price changes for each index on CPI-day in comparison to all trading days over the same period. Note the average move for RUT is 50 basis points higher than the average move on all trading days. This narrows a bit for NDX at 44 basis points and SPX at 29 basis points. Also, note each index gained more than the average move on CPI-day than the average over the last twelve reports.

The more interesting data is the performance of 1-day at-the-money (ATM) straddles on the close before CPI-day and at settlement on the day of the report. We track short option trading as a typical institutional use for short term index options is to take short positions. Both NDX and SPX 1-day ATM straddles overpriced the following day move four of twelve reports. Typically, this figure is closer to 60%. RUT is an outlier, overpricing the move 75% of observations (nine of twelve). Finally, consistent sellers of NDX and SPX straddles on CPI-day would realize substantial losses, something that is untrue for RUT straddles.

Based on the data above, those wanting to take a short position in equity market volatility in front of CPI may be attracted to the RUT complex. However, those who think the market reaction will be greater than what the option market is expecting should check on NDX options late on Tuesday.

These final graphics show the last twelve price change and option pricing for NDX, SPX, and RUT over the past twelve reports.

Data Sources: Bloomberg & Author Calculations

Data Sources: Bloomberg & Author Calculations

Data Sources: Bloomberg & Author Calculations

Data Sources: Bloomberg & Author Calculations

Data Sources: Bloomberg & Author Calculations

Data Sources: Bloomberg & Author Calculations